Keon Ltd has two mutually exclusive projects under consideration. Both projects can be considered…
Keon Ltd has two mutually exclusive projects under consideration. Both projects can be considered replacement projects.
Keon Ltd has two mutually exclusive projects under consideration. Both projects can be considered replacement projects.
The details of the projects are given in the table below.
Project A
Project B
Development costs to date
$125,000
$135,000
Life of project
4 years
5 years
Depreciation
Straight line, fully over life of project
Straight line, fully over life of project
Machine cost
$2.4 million
$3.5million
Residual
No residual
No residual
Working capital needs
Injection of $250,000 at beginning of project
One injection only of $500,000 at beginning of project
Further injection of $150,000 at the end of year 1
Sales
$1.3m for each year of the project
$1.57 m for each year of the project
Cost of sales
$0.23m for each year of the project
$0.345m for each year of the project
Other costs
$0.016m for each year of the project
$0.026m for each year of the project
Finance needs
Yule Ltd would need to borrow $1m for 3 years at 7% p.a.
Yule Ltd would need to borrow $1.1m for 4 years at 7% p.a.
Tax rate
25%
25%
Discount rate for project
12.5%
12.5%
There is no inflation.
Use NPV analysis to advise Keon Ltd as to which project, if either, should be adopted.
